Carney's Bold Defense Plan: Opportunities for Canadian Investors

A policy break with the past

Canada has long lagged behind its NATO peers in terms of defense spending. According to a May report published by CIBC, Canada allocated only 1.4 percent of its GDP to defense in 2024.

Carney's new commitments, which allocate 3.5 percent for core military spending and 1.5 percent for broader security investments like critical infrastructure, mark a stark contrast. The 2025/2026 plan from Department of National Defense and the Canadian Armed Forces underscores how this funding will be deployed, outlining a heightened focus on the Arctic and modernization of the North American Aerospace Defense Command (NORAD).

The plan also prioritizes safeguarding Canada's defense assets, enhancing allied interoperability and integrating advanced technologies like artificial intelligence, nuclear deterrence and drones into training.

To address vulnerabilities such as transportation and manufacturing disruptions, Ottawa will develop a Defense Industrial Strategy aimed at securing timely access to key capabilities while reinforcing the domestic industrial base.

Ottawa is also planning a standalone Canadian Defense Procurement Agency, overseen by Stephen Fuhr, secretary of state for defense procurement, to deliver on these commitments.

For domestic contractors frustrated by bureaucracy and delays, these developments could be a game changer.

Economic impact of defense spending

The RBC and CIBC reports both indicate that defense spending has a positive economic multiplier.

RBC analysts suggest that new Canadian spending commitments that prioritize major equipment purchases could change the breakdown of the nation's defense budget, which typically allocates 50 percent to personnel, 25 percent to operations, 20 percent to capital and 5 percent to infrastructure. As per NATO's guidelines for members, at least 20 percent of countries’ defense spending must go toward new equipment purchases.

For its part, CIBC suggests the benefits could be “larger than perceived,” with “multiple short-and long-term positive spinoffs,” including job creation, refuting the idea that defense spending “crowds out” other economic activity.

CIBC highlights defense-related research and development (R&D) as the most powerful driver of long-term economic growth in its reports, with the potential to double the economic benefit of initial spending.

Mehrdad Hariri of the Canadian Science Policy Center has also made a case for R&D spending, arguing for at least a 20 percent allocation of the defense budget, citing dual-use technologies as a catalyst for growing the broader economy.

Dual-use capabilities can also be a bridge for investors with ESG or pension constraints that avoid pure defense stocks.

Canadian defense subsectors to watch

RBC’s report identifies key sectors to watch in Canada's defense market. Air, land and marine systems are listed as the country's “core domains” of defense production, supported by strong manufacturing bases in Ontario and Québec for things like combat vehicles, aircraft fabrication, naval shipbuilding and maintenance.

Carney’s pledge to prioritize domestic suppliers is a clear signal to the Canadian defense industrial base, with industry observers linking strategic priorities to concrete market opportunities. As the Globe and Mail’s Pippa Norma has reported, Ottawa’s spending surge is set to help position homegrown players like CAE (TSX:CAE,NYSE:CAE), Calian Group (TSX:CGY), Bombardier (TSX:BBD.A,TSX:BBD.B) and Seaspan to capture new contracts.

In the shipbuilding sector, Ontario's C$215 million initiative aims to revitalize the province’s warship industry by boosting its shipbuilding capacity for the National Shipbuilding Strategy, an industry dormant since WWII.

Ontario Premier Doug Ford and Vic Fedeli, the province's minister of economic development, job creation and trade, recently met with senior executives of Algoma Steel Group (TSX:ASTL,NASDAQ:ASTL) to discuss the company supplying steel for the defense industry, potentially securing multibillion-dollar contracts for Canadian navy corvettes designed by Italy's Fincantieri (BIT:FCT), one of the world's leading shipbuilders.

“We let them know that if they try to pivot…we would be there to help them,” Fedeli told the Globe and Mail.

Another Canadian firm, Davie Shipbuilding, plans to leverage its recent acquisition of two Texas shipyards to develop local shipbuilding capacity to secure a contract to build icebreakers for the US.

The federal government is also actively pursuing partnerships. The EU defense pact, which Canada signed in June, opens a new market beyond the established US-integrated supply chains. As a recent example, Canadian armored-vehicle maker Roshel has partnered with Swedish steel producer Swebor to manufacture ballistic-grade steel in Canada.

“This project goes beyond steel — it is about establishing industrial sovereignty. By bringing ballistic steel production to Canada, we are reducing a critical dependency, protecting our supply chain, and laying the groundwork for long-term resilience in the defense and manufacturing sectors," said Roshel CEO Roman Shimonov in a press release.

This news comes as Canada reviews the purchase of 88 F-35 Lightning fighter jets from US defense contractor Lockheed Martin (NYSE:LMT). Carney ordered the review in March, saying Canada is overreliant on the US defense industry.

While no final decision has been made, the most likely alternative to the F-35 would be the Saab Gripen, a Swedish-made fighter jet. Mélanie Joly, Canada's minister of innovation, science and industry, visited Saab facilities during a mid-August trip to Sweden and Finland to discuss industrial defense ties between Europe and Canada, but said it was a “normal” part of her job and that she will also meet with US executives from Lockheed Martin.

Risks and realities

While the investment potential of Canada's defense sector is clear, execution challenges remain. Coverage from the Globe and Mail's Norma highlights that sentiment among executives is both wary and optimistic.

Canada’s procurement system has a long history of delays and cost overruns, and scaling up production capacity, especially outside US-integrated supply chains, will take time.

Smaller firms warn that slow procurement cycles can threaten their survival, while larger players see clear opportunities in space systems, advanced training and construction for aircraft and naval vessels.

However, RBC analysts warn that funding via higher taxes or debt could dilute the economic benefit, particularly if spending displaces other high-multiplier programs.

Investor takeaway

The "Buy Canadian" directive could offer a rare moment for investors to position themselves early in a sector poised to be reshaped by unprecedented spending and technological advancement.

The sheer scale of the commitment signals a transformative period.

If effectively implemented, Carney’s plan could ignite a multi-decade boom in Canada’s defense sector, expanding opportunities well beyond traditional defense stocks and into aerospace, cybersecurity and dual-use technologies.

However, as Michael M. Smith, COO at Canadian venture capital firm ONE9, wrote for the Windsor Star:

“A new mandate alone will not transform the system if those executing it remain tethered to the same institutional caution. True reform will require individuals willing to challenge orthodoxy even when it carries political cost, those who will reject legacy processes and bloated vendor ecosystems in favour of speed, survivability, and sovereign capability.”

While the pathway may present hurdles, the foundational policy and capital are in place for a dynamic new era in Canadian defense.